1.1 — The Tools of Microeconomics

# 1.1 — The Tools of Microeconomics
## ECON 306 • Microeconomic Analysis • Spring 2021
### Ryan Safner<br> Assistant Professor of Economics <br> <a href="mailto:safner@hood.edu"><i class="fa fa-paper-plane fa-fw"></i>safner@hood.edu</a> <br> <a href="https://github.com/ryansafner/microS21"><i class="fa fa-github fa-fw"></i>ryansafner/microS21</a><br> <a href="https://microS21.classes.ryansafner.com"> <i class="fa fa-globe fa-fw"></i>microS21.classes.ryansafner.com</a><br>

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# About Me

- Ph.D (Economics) — George Mason University, 2015

- B.A. (Economics) — University of Connecticut, 2011

- Specializations:
  - Law and Economics
  - Austrian Economics

- Research interests
  - modeling innovation & economic growth
  - political economy & economic history of intellectual property

- Expecting a son in March 👶 (expect cameos!)
]
]

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# *Micro*-economics

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# Micro- vs. Macro-economics

- What is “an economy?”

- Where do aggregates (“GDP”, “unemployment”, & “inflation”) come from?

- .hi[Micro]: [modeling] .hi-purple[Choices] and .hi-purple[consequences]

- .hi[Macro]: [modeling] .hi-purple[Systemic interaction] of choosers & .hi-purple[emergent behavior]

]

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# Where You Are Now

.pull-left[
- .hi-purple[Basic concepts] of markets, individuals (consumers & firms), economies:
    - ECON 205: Principles of Macroeconomics
    - ECON 206: Principles of Microeconomics

- .hi-purple[Modelling] markets, individuals (consumers & firms), economies
    - ECON 306: Microeconomic Analysis
    - ECON 305: Macroeconomic Analysis<sup>.magenta[†]</sup>
]

.pull-right[
.center[
![](../images/choices.jpg)
]
.footnote[<sup>.magenta[†]</sup> Required for ECON majors only. Calculus I required.]

]

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# Economists Speak a Foreign Language...

- Terms you “know” from ordinary life mean .hi-purple[very different things] to economists:

> Cost, efficiency, welfare, competition, marginal, equilibrium, profit, public good, discrimination, elasticity

- Using these words’ “ordinary” meanings can lead to *wrong* economic conclusions!

- You will need to .hi-purple[“relearn”] the economic meanings of these words
]

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# ...But You Can Learn It

- You’ll need to master a new vocabulary:

> marginal rate of substitution, marginal cost, consumer surplus, allocative efficiency, externality

- Avoid excessive jargon, but these concepts are useful to explain reality!

]

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# Don't Think You Know It Already!

- Everyone thinks they are *already* an economist and can speak this foreign language

- Be humble!

- Economics is *often* common sense, but reached via deep analytical thinking

]

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# And Tread Cautiously

- An application of the famous [“Dunning-Kreuger effect”](https://en.wikipedia.org/wiki/Dunning%E2%80%93Kruger_effect) in social psychology

]

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# Economics `$\neq$` Business or $$$

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# Economics `$\neq$` Business or $$$

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# Economics Can Be Difficult

- Economics is hard!

- We are literally retraining and rewiring your brain to see the world in a new way

- If you “don't get it” you can't just try to memorize a bunch of facts

]

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# Economics Can Be Difficult

- Not trying to scare you! (I'd rather say this now than after Exam 1.)
  - .hi-purple[Grades don't reflect your worth as a person!]

- .hi[Comparative advantage]: nobody can be good at everything!
  - I'm awful at accounting, chemistry, etc.

]

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# The Uses of Economics

- Most of you will not become professional economists — that's OK
  - Economics is a .hi-purple[liberal art], useful to you even if it's not your career

- Understand .hi-turquoise[“how the world works”]

]

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# The Uses of Economics

- A great .hi-purple[bullshit-detector], especially about self-interested, squishy, or political statements

- People love to forget that we have to make tradeoffs
  - “Economics puts parameters on people's utopias”

]

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# The Tools of Microeconomics

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# Economics as a *Way of Thinking*

- Economics is a .hi-purple[way of thinking] based on a few core ideas:
]

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# Economics as a *Way of Thinking*

- Economics is a .hi-purple[way of thinking] based on a few core ideas:

- .hi[People respond to incentives]
    - Money, punishment, taxes and subsidies, risk of injury, reputation, profits, sex, effort, morals

]

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# Economics as a *Way of Thinking*

- Economics is a .hi-purple[way of thinking] based on a few core ideas:

- .hi[People respond to incentives]
    - Money, punishment, taxes and subsidies, risk of injury, reputation, profits, sex, effort, morals

- .hi[Environments adjust until they are in equilibrium]
    - People adjust their choices until optimal, given others’ actions
]

![:scale 70%](../images/equilibriumbalance.png)
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]

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# Incentives

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# Incentives Example: Subway I

The NYC Subway bans dogs unless they can be [“enclosed in a container”](https://cityroom.blogs.nytimes.com/2009/09/30/answers-about-exploring-new-york-with-your-dog/?_r=0)
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# Incentives Example: Subway II

Pictures [Source](https://www.rover.com/blog/nyc-subway-dogs-fs/)
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# Incentives Example: Rat Bounty

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# Incentives: Even Dolphins Understand I

.source[July 2 2003, [“Why Dolphins are Deep Thinkers”](https://www.theguardian.com/science/2003/jul/03/research.science), *The Guardian*]

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# Incentives: Even Dolphins Understand II

.source[July 2 2003, [“Why Dolphins are Deep Thinkers”](https://www.theguardian.com/science/2003/jul/03/research.science), *The Guardian*]

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# Incentives: Monkeys Too

.source[January 17, 2021, [These Monkeys Understand Economics and Intentionally Steal High-Ticket Items to Barter for Better Food, Study Finds](https://gizmodo.com/these-monkeys-understand-economics-and-intentionally-st-1846078932?utm_medium=sharefromsite&utm_source=_facebook), *Gizmodo*]

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# Takeaways About Incentives I

- People respond to (changes in) incentives

- People have goals they seek to attain

- Making one alternative more costly `$\neq$` people *stop* pursuing their goals

- People will seek (less preferred) *alternative* methods to attain goals

- .hi-purple[Unintended consequences]!

]

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# Takeaways About Incentives II

.center[
<blockquote class="twitter-tweet"><p lang="en" dir="ltr">Whenever I am working on policy decisions I think of this image... 🚴
♂️ <a href="https://t.co/GE3yyDmjs0">pic.twitter.com/GE3yyDmjs0</a></p>&mdash; Councillor Peter Fortune (@PeterTFortune) <a href="https://twitter.com/PeterTFortune/status/1159176114230763520?ref_src=twsrc%5Etfw">August 7, 2019</a></blockquote> <script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
]

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# Equilibrium

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# Equilibrium Example I

- Suppose 2 roads connect Frederick and Washington

- 100 cars commute

- Local road travel time: 30 min + 1 min/car

- Highway travel time: 1 hour (always)
]

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# Equilibrium Example I

- Suppose 2 roads connect Frederick and Washington

- 100 cars commute

- Local road travel time: 30 min + 1 min/car

- Highway travel time: 1 hour (always)

- Assume people .hi[optimize]: choose road to **minimize travel time** between cities
]

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# Equilibrium Example II

- Suppose 2 roads connect Frederick and Washington

- 100 cars commute

- Local road travel time: 30 min + 1 min/car

- Highway travel time: 1 hour (always)

.bg-washed-green.b--dark-green.ba.bw2.br3.shadow-5.ph4.mt5[
.green[**Scenario I**:] There are **less than 30 cars** on the local road
]
]

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# Equilibrium Example III

- Suppose 2 roads connect Frederick and Washington

- 100 cars commute

- Local road travel time: 30 min + 1 min/car

- Highway travel time: 1 hour (always)

.bg-washed-green.b--dark-green.ba.bw2.br3.shadow-5.ph4.mt5[
.green[**Scenario II**:] There are **more than 30 cars** on the local road
]
]

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# Equilibrium Example IV

- Suppose 2 roads connect Frederick and Washington

- 100 cars commute

- Local road travel time: 30 min + 1 min/car

- Highway travel time: 1 hour (always)

.bg-washed-green.b--dark-green.ba.bw2.br3.shadow-5.ph4.mt5[
.green[**Equilibrium**:] How many cars are on each road? (Why?)
]
]

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# Equilibrium Example V

- Local road travel time: .hi-purple[30 min + 0.5 min/car]

- Highway travel time: 1 hour (always)
]
]

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# Equilibrium Example V

- Local road travel time: .hi-purple[30 min + 0.5 min/car]

- Highway travel time: 1 hour (always)

- .hi-green[Will this reduce travel time?]

- Yes! says the State:
    - 30 cars use the local road, takes 1 hour
    - With wider road it takes 45 min!
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]

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# Equilibrium Example V

- Local road travel time: .hi-purple[30 min + 0.5 min/car]

- Highway travel time: 1 hour (always)

- .hi-green[Will this reduce travel time?]

- Yes! says the State:
    - 30 cars use the local road, takes 1 hour
    - With wider road it takes 45 min!

- .hi[Is this an equilibrium?]
]
]

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# In the Long Run...(& Repeating the Same Mistake)

.center[
<blockquote class="twitter-tweet"><p lang="en" dir="ltr">1970: One more lane will fix it.<br>1980: One more lane will fix it.<br>1990: One more lane will fix it.<br>2000: One more lane will fix it.<br>2010: One more lane will fix it.<br>2020: ?<a href="https://t.co/NjS1IPORG2">pic.twitter.com/NjS1IPORG2</a><br>via <a href="https://twitter.com/avelezig?ref_src=twsrc%5Etfw">@avelezig</a></p>&mdash; Urban Planning &amp; Mobility 🚲🚶
♂️🚆 (@urbanthoughts11) <a href="https://twitter.com/urbanthoughts11/status/1191295205187686400?ref_src=twsrc%5Etfw">November 4, 2019</a></blockquote> <script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script> 
]

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# Comparative Statics

- .hi[Comparative statics]: examining changes in equilibria cased by an external change (in incentives, constraints, etc.)

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# Optimization and Equilibrium

.pull-left[
- If people can .hi-purple[learn] and .hi-purple[change] their behavior, they will tend to **switch** to a higher-valued option

- If there are no alternatives that are better, a person is at an .hi[optimum]

- Everyone is at an optimum `$\iff$` the system is in .hi[equilibrium]
]

![:scale 70%](../images/equilibriumbalance.png)
]
]

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# Economics Is Broader Than You Think

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# Real Talk: The Math

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# Real Talk

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# Real Talk

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# Real Talk

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# Real Talk

- Complete the .hi-purple[preliminary math survey]

- Help me help you with the math!

]

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# Why We Model I

- Economists often “speak” in models that explain and predict human behavior

- The pure language of models is mathematics
    - things that are universally true, deducible from axioms, can easily spot errors
    - often equations and graphs
    - this is what scares students most about economics

]

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# Why We Model II

- Economists use conceptual models: fictional constructions to logically examine consequences

- Very different from other sciences
    - No social experiments
    - Purposive, strategic human beings 
    - Introspective understanding

> “All models lie. The art is telling useful lies.” - George Box

]

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# The Two Major Models of Economics as a “Science”

## Optimization

- Agents have .hi[objectives] they value

- Agents face .hi[constraints]

- Make .hi[tradeoffs] to maximize objectives within constraints

## Equilibrium

- Agents .hi[compete] with others over **scarce** resources

- Agents .hi[adjust] behaviors based on prices

- .hi[Stable outcomes] when adjustments stop

]

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# Remember: All Models are Wrong!

.pull-left[
.bg-washed-red.b--dark-red.ba.bw2.br3.shadow-5.ph4.mt5[
.red[**Caution**:] Don't conflate models with reality!
]
- Models help us *understand* reality.

- A good economist is always aware of:
    - “*ceterus paribus*”
    - “...and then what?”
    - “...compared to what?”

]

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# Economics Uses, but Is Not Limited to, Math

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# Again, Beware Mt. Stupid

.pull-left[
.bg-washed-red.b--dark-red.ba.bw2.br3.shadow-5.ph4.mt5[
.red[**Caution**:] Two types of (advanced) mistakes:
]
1. Believing the model accurately describes reality (100%)

2. Believing reality needs to be *corrected* because it doesn't match the model
]

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# Logistics: Hybrid Course

.smaller[
- .hi[Hybrid]: more .hi-purple[synchronous] material than .hi-turquoise[asynchronous] material

- I will always be teaching .hi[remotely]
  - A classroom is available to you

- Office hours: Tu/Th 3:30-5:00 PM on Zoom
  - <svg style="height:0.8em;top:.04em;position:relative;fill:#5E81AC;" viewBox="0 0 576 512"><path d="M336.2 64H47.8C21.4 64 0 85.4 0 111.8v288.4C0 426.6 21.4 448 47.8 448h288.4c26.4 0 47.8-21.4 47.8-47.8V111.8c0-26.4-21.4-47.8-47.8-47.8zm189.4 37.7L416 177.3v157.4l109.6 75.5c21.2 14.6 50.4-.3 50.4-25.8V127.5c0-25.4-29.1-40.4-50.4-25.8z"/></svg> <i class="fas fa-video"></i> Zoom link in Blackboard's `LIVE CLASS SESSIONS` link
  - <svg style="height:0.8em;top:.04em;position:relative;fill:#5E81AC;" viewBox="0 0 448 512"><path d="M94.12 315.1c0 25.9-21.16 47.06-47.06 47.06S0 341 0 315.1c0-25.9 21.16-47.06 47.06-47.06h47.06v47.06zm23.72 0c0-25.9 21.16-47.06 47.06-47.06s47.06 21.16 47.06 47.06v117.84c0 25.9-21.16 47.06-47.06 47.06s-47.06-21.16-47.06-47.06V315.1zm47.06-188.98c-25.9 0-47.06-21.16-47.06-47.06S139 32 164.9 32s47.06 21.16 47.06 47.06v47.06H164.9zm0 23.72c25.9 0 47.06 21.16 47.06 47.06s-21.16 47.06-47.06 47.06H47.06C21.16 243.96 0 222.8 0 196.9s21.16-47.06 47.06-47.06H164.9zm188.98 47.06c0-25.9 21.16-47.06 47.06-47.06 25.9 0 47.06 21.16 47.06 47.06s-21.16 47.06-47.06 47.06h-47.06V196.9zm-23.72 0c0 25.9-21.16 47.06-47.06 47.06-25.9 0-47.06-21.16-47.06-47.06V79.06c0-25.9 21.16-47.06 47.06-47.06 25.9 0 47.06 21.16 47.06 47.06V196.9zM283.1 385.88c25.9 0 47.06 21.16 47.06 47.06 0 25.9-21.16 47.06-47.06 47.06-25.9 0-47.06-21.16-47.06-47.06v-47.06h47.06zm0-23.72c-25.9 0-47.06-21.16-47.06-47.06 0-25.9 21.16-47.06 47.06-47.06h117.84c25.9 0 47.06 21.16 47.06 47.06 0 25.9-21.16 47.06-47.06 47.06H283.1z"/></svg> Slack channels

- Teaching Assistant(s): TBD
  - grade HWs & hold (likely virtual) office hours
]

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# Logistics: Hybrid Course

- We will have .hi-purple[synchronous] sessions on **<i class="fas fa-video"></i> Zoom**
  - Section 1: Mon/Wed 2:00-3:15 PM
  - Section 2: Tu/Thu 2:00-3:15 PM

- Lecture videos will be posted on **Blackboard** via Panopto for students unable to join synchronously
  - If you were present, you do not need to watch the video (again)!
  - You are not *required* to attend synchronously, but it will help you

- All graded assignments are .hi-turquoise[asynchronous]
  - Submitted on Blackboard by 11:59 PM Sundays
  - Timed exams on Blackboard

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# Using Zoom (& Slack, etc): A Polite Request

<blockquote class="twitter-tweet"><p lang="en" dir="ltr">My professor teaching to class on zoom: <br><br>🧑🏻‍🏫<br><br>Me, trying to prevent my professor from teaching into the void: <br><br>◼️◼️◼️🙂◼️◼️◼️◼️◼️◼️◼️◼️<br>◼️◼️◼️◼️◼️◼️◼️◼️◼️◼️◼️◼️◼️◼️◼️◼️◼️◼️◼️◼️◼️◼️◼️◼️</p>&mdash; Adrianna (@adri_holmes00) <a href="https://twitter.com/adri_holmes00/status/1314253784638513155?ref_src=twsrc%5Etfw">October 8, 2020</a></blockquote> <script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>

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# Learning Goals

By the end of this course, you will:

1. apply the models of microeconomics (constrained optimization and equilibrium) towards explaining real world behavior of individuals, firms, and governments

2. explore the effects of economic and political processes on market performance (competition, market prices, profits and losses, property rights, entrepreneurship, market power, market failures, public policy, government failures)

3. apply the economic way of thinking to real world issues in writing

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# Assignments

<table>
 <thead>
  <tr>
   <th style="text-align:left;">  </th>
   <th style="text-align:left;"> Assignment </th>
   <th style="text-align:left;"> Percent </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:left;"> 1 </td>
   <td style="text-align:left;"> Opinion-Editorial </td>
   <td style="text-align:left;"> 20% </td>
  </tr>
  <tr>
   <td style="text-align:left;"> n </td>
   <td style="text-align:left;"> Homeworks (Average) </td>
   <td style="text-align:left;"> 20% </td>
  </tr>
  <tr>
   <td style="text-align:left;"> 3 </td>
   <td style="text-align:left;"> Exams </td>
   <td style="text-align:left;"> 20% each </td>
  </tr>
</tbody>
</table>

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# Your “Textbook”

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# Course Website

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# Tips for Success, Or: How to College

- Read the readings.

- Ask questions, come to office hours. Don’t struggle in silence, you are not alone!

- You are learning how to learn

- See the [resources page](http://microS21.classes.ryansafner.com/resources) for more
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# Roadmap for the Semester